In re Century Aluminum Co. Sec. Litig..

• Decision Date: 27 April 2010
• Docket Number: No. C 09–1162 SI,No. C 09–1205 SI,No. C 09–1103 SI,No. C 09–1001 SI,C 09–1001 SI,C 09–1205 SI,C 09–1103 SI,C 09–1162 SI
• Citation: 749 F.Supp.2d 964
• Parties: In re CENTURY ALUMINUM COMPANY SECURITIES LITIGATION.
• Court: U.S. District Court — Northern District of California

749 F.Supp.2d 964

In re CENTURY ALUMINUM COMPANY SECURITIES LITIGATION.

Nos. C 09–1001 SI, C 09–1205 SI, C 09–1103 SI, C 09–1162 SI.

United States District Court, N.D. California.

April 27, 2010.

Bruce A. Ericson, Jeffrey Scott Jacobi, Pillsbury Winthrop Shaw Pittman LLP, San Francisco, CA, for Century Aluminum Company.

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS AND GRANTING PLAINTIFFS LEAVE TO AMEND

SUSAN ILLSTON, District Judge.

On April 23, 2010, the Court held a hearing on defendants' motions to dismiss the first amended consolidated class action complaint, and on the underwriter defendants' motion to strike. For the reasons set forth below, the Court GRANTS defendants' motions to dismiss and GRANTS plaintiffs leave to amend the complaint. The Court DENIES as moot the underwriter defendants' motion to strike. The Court GRANTS defendants' requests for judicial notice.

BACKGROUND

On January 29, 2010, plaintiffs filed a first amended consolidated class action complaint against Century Aluminum Company (“Century”), a number of Century officers and members of the Century Board of Directors, and two underwriters, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Plaintiffs allege claims under the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78 et seq., and under the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77 et seq.¹

Plaintiffs' Securities and Exchange Act claims are plead separately and independently, and the complaint alleges different classes for the Exchange Act and Securities Act claims. However, the gravamen of all of plaintiffs' claims is that Century issued false and misleading financial statements in November 2008 and in connection with a January 29, 2009 secondary offering of common stock, and that these false and misleading statements incorrectly portrayed Century as “liquid and cash-rich, when—in reality—it was not.” FAC ¶ 18. Plaintiffs allege that the truth about Century's financial condition was revealed when the company issued a restatement on March 2, 2009, and that upon news of the restatement, Century's stock dropped 24% to close at $1.68, compared to the previous trading day's close of $2.22, a loss of $40 million in market capitalization in one day, and a significant drop from the January 29, 2009 offering price of $4.50. Id. ¶¶ 13–14.²

Century is a holding company which through its subsidiaries, manufactures and produces aluminum and aluminum products. Id. ¶ 5. Century was formed by Glencore International of Switzerland, as a holding company for that corporations's aluminum producing assets. Id. The complaint alleges that by mid–2008, the “commodities markets were in peril, and the market for aluminum in particular was being heavily compromised.” Id. ¶ 6. Century was facing rising raw material input prices and declining prices for aluminum due to problems in the auto, heavy truck and commercial building industries. Id. ¶ ¶ 6–7. By late 2008, Century was incurring substantial monthly losses, culminating in a net loss of $700.2 million (or $14.27 per share) for the Fourth Quarter of 2008. Id. ¶ 9. In addition, Century was forced to take a $94.8 million charge for “goodwill impairment” ($1.93 per share), a tax charge of $522.9 million ($10.66 per share) based on a “recording of a valuation allowance on deferred tax assets,” and an inventory write-down charge of $55.9 million ($1.14 per share). Id.

The complaint alleges that “[t]o compound matters, ... defendants ... were facing the loss of their positions, control and holdings in Century Aluminum due to their losses on the open market.” Id. ¶ 8. In mid–2008, Century owed over $750 million to commodities trading conglomerate Glencore Ltd., as a result of certain risky derivatives or “forward financial sales contracts.” Id.³ The parties refer to these contracts as the “Hedges.” ⁴

On July 7, 2008, after three years of steady losses under the Hedges as a result of increasing aluminum prices, Century and Glencore agreed to terminate the Hedges. Under the transaction, (1) Glencore discharged $1.832 billion of liabilities owed from Century to Glencore; (2) Century made a cash payment of $225 million and gave Glencore a note for the deferred settlement amount of $505.198 million; (3) Century issued to Glencore 160,000 shares of preferred stock, convertible into 16,000,000 shares of common stock; (4) Glencore paid Century, in cash, the purchase price of the preferred stock, $1,090,259,200, which sum Century immediately paid back to Century in partial settlement of Century's liabilities associated with the Hedges.⁵ See Century RJN, Ex. 17 at 721–23, 771 (Nov. 10, 2008 Form 10–K).

On July 8, 2008, Century disclosed the transaction to the public by (1) holding a conference call with analysts and investors to explain the transaction, Id. Ex. 5–6, (2) filing an 8–K announcing that it had agreed to terminate the Hedge via the execution of four agreements, all of which were attached in their entirety to the 8–K, Id. Ex. 3 at 186–260, and (3) filing a 13D/A detailing Glencore's purchase of preferred stock from Century, including all of the cash that changed hands as part of this transaction. Id. Ex. 4 at 276–80.

Plaintiffs' claims arise out of how this financial transaction was classified in Century's November 2008 quarterly financial statement, as well as in the January 29, 2009 secondary offering prospectus. In both statements, certain cash elements of the transaction were classified as “Cash Flows From Operating Activities” instead of as “Cash Flows From Financing Activities.” FAC ¶ 10. Plaintiffs allege, “As such, Century Aluminum falsely reported in its [November 2008] quarterly report (Form 10–Q) that the Company had a surplus of $230,759,000 in free cash flows provided by operating activities in the third fiscal quarter of 2008 when in reality Century Aluminum had a deficit of $698,721,000.” Id. Plaintiffs allege that defendants' misclassification of cash flows violated Generally Accepted Accounting Principles (“GAAP”).

On March 2, 2009, Century filed a Restatement that informed shareholders and investors that the Company's “previously issued financial statements for the nine months ended September 30, 2008 .... should no longer be relied upon as a result of an error in the interim consolidated statement of cash flows.” Century RJN, Ex. 30 at 1063.⁶ The Restatement states, “The Company initially reported cash flows associated with the termination of forward financial sales contracts [the Hedges] by issuing $929 million of Series A Convertible Preferred Stock on a net basis as an operating activity. Management has concluded the transaction should have been presented on a gross presentation basis as both an operating activity and a financing activity to reflect the cash receipts and disbursements associated with the transaction.” Id. The revised statement of cash flows shows the movement of $929,480,000 from “cash flows from operating activities” to “cash flows from financing activities,” without any effect on “net change in cash,” “cash at the beginning of the period” or “cash at the end of the period.” Id. at 1064. The Restatement also did not affect Century's balance sheet, income statement, or statement of shareholders' equity.

The complaint alleges that with the inflated statement of cash flows from operating activities, Century was able to seek an additional influx of cash from the only avenue remaining to the company: a public offering of stock. Id. ¶ 11. On January 29, 2009, Century made a secondary offering of common stock at $4.50 per share. Id. ¶¶ 17, 72, 176.

At the time of the offering, Century was in the midst of a dire financial situation and was facing plant shutdowns, mounting losses and debts, and possible bankruptcy. The January 29, 2009 prospectus states, “Our financial position and liquidity have been and will continue to be materially adversely affected by declining aluminum prices. If prices remain at current levels or continue to decline, we will have to take additional action to reduce costs, including significant curtailment of our operations, in order to have the liquidity required to operate through 2009, and there can be no assurance that these actions will be sufficient.” Century RJN, Ex. 22 at 829. The prospectus also disclosed that Century suffered a substantial Q4 operating loss, stood to lose even more the next quarter, had a negative operating cash flow, would be taking an impairment charge to its goodwill, had to write down inventories, had worsening liquidity problems, and that Moody's had downgraded its credit rating. Id. at 827, 831, 833, 852–54, 856–57, 871–74.

Plaintiffs allege that because of these disclosed problems, “there can be no doubt that information concerning Century Aluminum's cash position was of the most valuable to investors and the market. As such, the ... Defendants should have been primarily concerned with the accuracy of the disclosures in the Secondary Offering Documents which concerned operating cash and cash-on-hand. Indeed, extra scrutiny should have been given to those accounting items in view of the Company's situation—not only with respect to outside auditors and underwriters—but also internally ( i.e., management, officers and the Board).” FAC ¶ 20. The complaint alleges that Century failed to implement sufficient and functional internal controls that would have discovered the false and misleading statements in the Registration Statement. Id.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). While courts do not require “heightened fact pleading of specifics,” Twombly, ...